1. Rights to Produce Externality

2. Externalities  refer to the spillovers which are the consequences of the action that actors don't take into account and therefore don't influence their decision.

3. Rules of the Game:  Now pair up yourselves.  One of you is a BarBQer who likes and wants to have barbecue;  The other is a neighbor to the BarBQer and thinks barbecue produces too much smoke.

4. Payoffs of Barbecue  For people who like barbecue (BarBQers) Barbecue payoffs  For people who don’t like barbecue(neighbors) Barbecue payoffs

5. Payoffs of BarBQer and neighbor Smoke level produced from barbecue ０ １ ２３ BarBQer’s total payoffs ＄０＄３０＄５０＄６０ Neighbor’s total payoffs ＄３５＄３０＄２０＄０ BarBQer + Neighbor’s payoffs ＄３５＄６０＄７０＄６０

6. A Smoke-Free Country  The neighbors have the right to be compensated for any smoke level over zero.  If any BarBQer wants to have barbecue, you have to pay to your neighbors as compensation.

7. A Barbecue Country  The BarBQers have the right to be compensated to accept any smoke level below three.  If any neighbor doesn’t want BarBQer to have barbecue, neighbor has to pay to BarBQer as compensation.

8. Compensation Agreement  Now you have three minutes to decide what smoke level your own pair will have.  Every pair should try to come to a satisfactory bargain.  Each pair will receive a Compensation Agreement.

9. Compensation Agreement for the Smoke-Free Country I, BarBQer ( barBQers’ name ), hereby claim that I will pay $ ( compensation amount ) to Neighbor ( neighbors’ name ) for providing the smoke level of ( smoke level ).

10. Compensation Agreement for the Barbecue Country I, Neighbor ( neighbors’ name ), hereby claim that I will pay $ ( compensation amount ) to BarBQer ( barBQers’ name ) for reducing the smoke level to ( smoke level ).

11. Zero Smoke Level  How many of you agree on smoke level zero?  Why did you choose to reach this level ?  What did you consider when you had the bargaining?  What was your compensation?

12. Smoke Level of One  How many of you agree on smoke level of one?  Why did you choose to reach this level ?  What did you consider when you had the bargaining?  What was your compensation?

13. Smoke Level of Two  How many of you agree on smoke level of two?  Why did you choose to reach this level ?  What did you consider when you had the bargaining?  What was your compensation?

14. Smoke Level of Three  How many of you agree on smoke level of three?  Why did you choose to reach this level ?  What did you consider when you had the bargaining?  What was your compensation?

15. Discussion  What is the assumption behind when we claimed that BarBQer (or neighbor) has the right to be compensated?

16. Property rights  It is socially enforced rights to select the use of an economic good. It can be seen as rules or criteria of competition which must exist to solve conflict.

17. Discussion  What is the best choice of the smoke level to both of BarBQer and neighbor when BarBQer has the right to be compensated?  What is the best choice of smoke level to both of BarBQer and neighbor when neighbor has the right to be compensated?

18. Conclusion  No matter who has the right, the same optimal choice can also be achieved.

19. Coase Theorem  It states that if property rights are well- defined or specified and transaction costs are zero, then:  the allocation of resources will be efficient as there is no problem of externalities,  the allocation of resources will be identical, regardless of the initial assignment of property rights.

20. End